Residual value, or resale value, is one of the most important factors to consider when buying a car—nearly all of them depreciate, but some much less than others.

When you buy a new car, it's fairly easy to research the costs involved, such as MSRP, local taxes, and delivery charges. We know, however, that the moment a car leaves the dealer's lot, it starts to lose value. But how is that math figured, anyway?

The amount you'll get when you trade in your car, the amount you'll have to put down on your next purchase/lease, and even the interest rate you can get on your next car loan are all impacted by the term you'll hear a lot: "residual value," which is synonymous with resale value. If you don't know the ins and outs of residual value, you're hurting yourself when it comes to buying a new or used car. All cars (except vintage collectibles) lose money over time (think of a used car as you would any used appliance—its worthwhile life expectancy is reduced with age). But buying cars that hold their value better than others isn't hard to figure out, and it's a good way to hedge against the costs of owning a vehicle.

The Basics

There's no hard-and-fast consensus on the value of a car after a year or five years from its first sale. There are just too many variables at play, including the market for the car, whether the economy is up or down, and the price of gas. Plus, if there are 40,000 used 2009 Accords on the market, each one will have been driven and cared for differently.

But there are variables that can be benchmarked, such as an automaker's and a model's past performance in keeping value, that organizations like Black Book use to estimate what a new car will be worth a few years down the line. Black Book is a lot like the Blue Book you hear about regarding the value of a car, but Black Book is the go-to that most car dealers use to price a new or used car. It also helps them know what interest rates you'll be charged on a loan.

We talked to Black Book's Ricky Beggs, in charge of the publication's research department, to get an idea of how they figure out what a 2013 model will be worth in 2018.

How Carmakers Keep Car Values High

Supply and demand plays a big role in the value of a particular model in a particular year. Too much "car," just like too much of any single commodity, will depress the value of a car over its life cycle.

Put another way, you might think Mercedes wants to sell as many C-Classes as it possibly can. And if demand were always bullish, that would be true. But Mercedes, just like Honda and every other carmaker, has a vested interest in keeping residual values high because that enables Mercedes to have a "cheap" money supply: How much interest they're charged through their captive finance arm (a bank whose sole job is to finance car loans for a single carmaker) directly influences whether they can offer you that nifty 0.9 percent financing deal. High residual values also mean that the certified-pre-owned (CPO) program Benz dealers run can continue to be highly lucrative. A flood of C-Classes two years from now would depress that CPO market. Carmakers try carefully to match production to demand because otherwise they have to crank up incentives (cash-back offers) to generate sales, and that's just the type of thing that led to GM and Chrysler falling into crisis. Eventually the cheap money spigot shuts off and the debt must be repaid.

So carmakers are smarter than ever at predicting sales volumes and will restrict production if they see storm clouds ahead. Today the cost of used cars is at or near an all-time high because carmakers cut supply during the recession, and because people started holding on to old cars instead of getting new ones. Add in a variable like high gas prices and in the past five years we've seen crazy things happen, like the value of a used Prius topping that of a new one, and diesel VW Jettas commanding nearly new-Jetta pricing. All of it has to do with carmakers being very careful with supply.

The Fuzzy Math of Leasing

Ricky Beggs of Black Book explains that high residual value not only favors frequent buyers and sellers (or leasers), it also favors the dealer.

Let's consider Mercedes again. The automaker is fighting for prestige in the luxury marketplace, and that means the company would prefer a tighter supply. So, for instance, Mercedes might offer its dealers an incentive to buy back current leaseholders' cars a few months early and give them the same lease rate on next year's model, especially at the start of a new model's life cycle. This has two effects. One, it tightens supply of that new model, in effect goosing demand so new customers have to pay a little more. Two, it increases the stocks of CPO cars the dealer has on hand.

But doesn't that second factor depress the marketplace, since it leads to more pre-owned cars sitting around? Not quite. That lease-buyback car the dealer gets on his lot a little early when he puts the customer in a brand-new C-Class increases the dealer's cash flow. He sells a lease on a brand-new C-Class, presumably with money down. And that tightened supply means the "value" of that car is probably higher, too, so the check the dealer gets from the bank/finance arm is fatter. As for the leased car that's now a couple of years old: It comes off-lease, goes into the CPO program, and the bank probably pays the dealer for its remaining value, since most customers finance their cars and pay back the bank over time.

Remember: Either the dealer or the bank (usually a captive finance arm) actually owned the car while the customer leased and drove it. If the bank owns the car, they sell it back to the dealer or to another dealer and pay back that difference to themselves once the car comes off-lease. If the dealer holds the paperwork, then they pay the bank back for the difference and move the car through their CPO program, paying themselves back.

Either way, the lessee is just making a monthly payment on the projected depreciation of that car, plus interest. And don't forget that all those hidden fees and interest from the customer pad everyone's bottom line.

All of this means that leasing is a lot like renting an apartment. You're always putting your dough into the landlord's pocket, paying for the privilege of using an apartment (or a car) but never owning any of it. But if you either can't afford to buy, or want to live in a classier pad (or drive a classier ride) than you can otherwise manage, renting/leasing makes that possible. Leasing a car that'll hold a higher resale/residual value softens the blow of that monthly payment. The bank and the dealership can give you a better deal if the car is going to lose comparatively little value while you lease it.

We're wading into some quirks of finance here. But it's worth noting that even if you never lease or buy used, this part of the marketplace determines how much a company can charge us for its new cars.

(Photo by fotog/Getty Images)

Retention Matters

There's another reason Mercedes wants to buy back current leases and put the leaseholders in next year's car: A huge part of evaluating the value of a model and an overall brand, and how much the cars will be worth down the road, is "retention," or the number of repeat customers.

Retention is still a fuzzy metric, especially among luxury brands that rely so heavily on the lease business. Subaru, by contrast, boasts a 72 percent retention rate, one of the highest in the business, and it isn't as dependent on leasing. This kind of loyalty helps Subaru get better financing from banks, and that also means customers get a better deal on financing.

Fuzzy or not, retention is something banks pay a lot of attention to because consistent business also dovetails with financially solvent customers. Deadbeats can't show their faces at a dealer again, and the opposite is also true: Dealers are thrilled to have customers with good credit come back every half decade and buy another Ford or Buick (and banks know these customers tend to be solid citizens who pay their bills on time). And loyalty, in turn, is thought to mean customers were happy with their purchases and had good experiences with their cars. All of that gets boiled into the special sauce know as "quality" and high residual values.

So Does Reputation

Ever wonder why Hyundai and Kia introduced their 100,000-mile "no-cost" warranties? It's because they didn't have a choice.

A decade ago, the Koreans had the worst reputation for quality among all carmakers this side of Yugo. They couldn't afford to have captive finance arms because the rates would've been absurd. Their residual values were also a joke, leading to, you guessed it, absurdly low pricing. That math was based on the sinking value of their used cars.

These days, Hyundai and Kia are closing fast on or have caught to some of their rivals, which speaks to how hugely improved their products are. But the legacy of sub-par quality is still factored into their new-car pricing, and will remain a legacy until they've put in years of stellar quality. A precedent can still be seen in GM, Chrysler, and Ford, and how poor their quality was in the 1970s and early 1980s, when many buyers switched to Toyota, Nissan, and Honda and refused to return to the domestics.

By contrast, a company with a stellar track record, like Toyota, can withstand a blow that might sink a Kia. "It's amazing how Toyota's reputation protected them in this crisis," Beggs says, referring to the allegedly stuck throttles on their Prius line (nothing was ever found to be a consistent mechanical problem by either the feds or any court, though Toyota has paid millions in settlements). Yes, Toyota paid a great deal, but their customer satisfaction ratings are back to the top of the market, and their residual-value rankings barely budged throughout the crisis.

When High Residual Value Is Good—and When It's Not

It might seem counterintuitive, but a car that holds its value is a good deal for the buyer only as long as you don't plan on holding on to that car forever. That's because you can get better financing on a car that holds its value, or lease it at a lower rate, or finance a high-residual-value lease or car loan at a cheaper rate, or just get more value out of it as a trade-in when you decide to get rid of it.

Of course, resale value is far from the only factor car buyers consider. People fall in love with a car or need a particular vehicle to suit their family's or business's needs. But the financial side of the picture argues in favor of buying the highest-residual-value car you can in any class, as long as you can afford it, because it's a bit like buying a blue-chip stock—one that's going to lose money, just a lot less money than a car with low residual value. Various residual-value calculators out there try to estimate which new cars will hold their value best.

A Few Tips:

First: Don't buy that car at the end of your lease—you'll get screwed on the price. The whole reason you got that zero-down (or low-money-down) rate and sweet monthly payment plan was because of the car's high residual value, which in theory would allow the dealer to get that dough back out of the car by selling it through his CPO program after your lease ended. By buying the car at the end of the lease you're not getting a sweet deal anymore. It's much smarter to lease again (try negotiating that while you're still in your current lease), buy used, or work a better CPO deal elsewhere (unless, perhaps, the estimated residual value was way off—or you simply love the car too much to part with it).

Second: Residual value is no guarantee of low maintenance costs. This is an easy one to forget, since some people equate high residual value with quality. But as we've seen, residual value has to do with much more than that. Luxury cars might hold their value (depending on the make and model), but parts and maintenance can be exceedingly expensive—a fact that's hidden somewhat by the leasing system, where maintenance is pretty much covered. Buy from a private seller and the high-residual equation is a little less of a sure bet.

Last: No matter what, know where you're buying in the life cycle of a car. The current 2013 Accord is the first year of the ninth generation. Maybe you were offered a great deal on a 2012 Accord, but that car's going to hold its value slightly less than in the first or second year of a new generation of car. This isn't hard and fast. First-year cars, especially new models, can have lots of issues. But if we're sticking with blue chips, like the Accord, then it's something to keep in mind, because people will want the newest bells and whistles.

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